Giving more power RBI an important step; implementation face challenges: Fitch

Recent actions of the Reserve Bank of India (RBI) in solving the non-performing assets problem is considered as a concerted push, Fitch Ratings said. 

Fitch Ratings, in its report on Friday, said, “We believe that asset resolution will be a dominant theme in the sector over the next few years.”

“The increased powers given to the Reserve Bank of India (RBI) to clean up asset quality, and to intervene in banks at an earlier stage when risks build, represents an important positive step toward ensuring a healthy banking system in the future,” Fitch said.

The central bank will also direct banks to initiate insolvency proceedings with respect to specific borrowers who are in default, and can appoint advisory committees to advise banks on the resolution of stressed assets.

Fitch said, "RBI direction that pushes banks into initiating insolvency processes against borrowers could help to break a deadlock caused by concerns among bank officials that decisions on troubled borrowers will attract investigation by anti-corruption agencies."

However, at the same time Fitch stated that there will be significant implementation challenges, but asset resolution is likely to strengthen over the next few years. 

Fitch said the NPA resolution will require significant haircuts if the re-priced loans are to attract attention from private investors and asset-reconstruction companies. 

At present, state-owned banks have a huge amount of stressed assets which is why they will witness low returns on assets for FY17, and any material recovery would be delayed as resolution crystallises losses and forces a higher level of provisioning. 

Gross NPAs which stood at Rs 1.3 lakh crore as on March 2012, have increased by a whopping 438.46% to Rs 7 lakh crore as on December 2016.

As per the Economic Survey, gross NPAs climbed to almost 12% of gross advances for public sector banks at end-September 2016.

Furthermore, in case of the weakest small-to-medium sized state banks, the continuous  losses arising from stressed assets could pressure them to shrink or eventually exit the system by entering into forced mergers.

Fitch said, "We expect the authorities to manage this in a way that is least disruptive for the financial system, but the process will entail risks for investors of capital securities, at least in the case of weakest banks. We believe it has become more likely that the number of state banks will fall in the medium term."